NHS trust accounts

NHS trust accountsA guide for non-executives

Published by the Healthcare Financial ManagementAssociation (HFMA), Suite 32, Albert House, 111 Victoria Street, Bristol BS1 6AXTel: (44) 0117 929 4789Fax: (44) 0117 929 4844E�mail: [email protected]

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This guide has been developed by the HFMA withsupport from the Audit Commission. The author isSteve Brown, HFMA Head of Policy.

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Foreword | 2

Acknowledgements | 2

Summary | 3

The primary statements | 6

Income and Expenditure Account | 6

Balance Sheet | 8

Cash Flow Statement | 10

Statement of Total Recognised Gains and Losses | 14

Notes to the accounts | 16

Contents

NHS trust accounts: a guide for non-executives | 1

NHS Trust Accounts: A Guide for Non�executives is a helpful companion to the well�established HealthcareFinancial Management Association (HFMA) Introductory Guide to NHS Finance and guides the reader step bystep through the annual accounts. It is essential reading for anyone without NHS finance expertise wishing tointerpret, understand and challenge a trust’s financial statements.

Financial reporting requirements are complex and understanding a set of NHS accounts can be difficult. Non�executive directors (NEDs) play a critical role providing effective scrutiny to ensure that accountability andvalue for money are demonstrated. This guide is designed to help NEDs and other users of the accounts firstunderstand and, more importantly, draw conclusions and ask pertinent questions about the trust’s accounts.

The guide provides the reader with easy to follow explanations of the primary statements and notes, withadditional boxed texts for key concepts. It clearly explains the role of the NED and the external auditor. It alsoincludes an invaluable list of questions for NEDs to assure themselves that the financial statements represent atrue and fair view of the trust’s finances.

Both the HFMA and the Audit Commission are committed to improving accountability and good financialreporting across the NHS and commend this guide to you as an important contribution in this area. We trustthat you will find the guide helpful.

Andy McKeonManaging Director, Health, Audit Commission

Andy LearyChairman, HFMA

The author is grateful for the help and guidance of the following people in the production of this guide:

Steve Appleton, Audit Commission

Robin Beeby, Department of Health

John Cooper, George Eliot Hospital NHS Trust

Tony Copeman, Doncaster Primary Care Trust

Richard Edwards, Audit Commission

Anna Green, HFMA

Emma Knowles, Audit Commission

Joanne Lowther, Department of Health

Richard Parker, George Eliot Hospital NHS Trust

Chris Steele, Department of Health

Steve Warren, Department of Health

Foreword

Acknowledgements

2 | NHS trust accounts: a guide for non-executives

NHS organisations have a statutory duty to produceannual accounts (also known as financial statements)and an annual report. The annual accounts are themain way in which trusts discharge their accountabilityto taxpayers and service users for their stewardship ofpublic money. The trust board is required to formallyapprove the accounts once they have been auditedand therefore it is vital that NEDs understand them.Alongside this formal requirement, understanding theannual accounts is imperative if NEDs are to fullyappreciate the financial health of their organisation. Thisis because, while the accounts reflect the immediatepast performance during the last 12 months, they alsoset out the financial foundations on which theorganisation will build its future performance.

The format of the accounts is specified by the NHStrust Manual for Accounts and consists of:

• four primary statements:

– Income and Expenditure Account;

– Balance Sheet;

– Cash Flow Statement; and

– Statement of Total Recognised Gains andLosses;

• notes to the accounts;

• statement on internal control;

• directors’ statement of responsibilities; and

• the auditor’s report.

This guide focuses on the four primary statementsand the notes to the accounts. Each primarystatement and the key notes to the accounts areexplained using an illustrative set of accounts. It isintended that NEDs will use the guide as a source ofreference to look at if additional understanding isrequired for a particular aspect of the accounts. Theguide also includes some questions that NEDs shouldconsider before approving the annual accounts.

NEDs’ responsibilitiesA critical aspect of a NED’s role is to provideconstructive challenge and scrutiny of theorganisation’s financial information and systems ofcontrol. To fulfil their financial managementresponsibilities, NEDs need to satisfy themselves thatthe organisation’s financial managementarrangements are operating effectively and that thefinancial reporting and the statement on internalcontrol are both accurate. (The statement on internalcontrol provides assurance about the system ofinternal control and demonstrates that accountableofficers (chief executives) are doing their reasonablebest to manage the principal risks to the organisationachieving its objectives.) The guide includes questionsthat NEDs could consider when providingconstructive challenge on the annual accounts. Themost important aspects to consider are whether therehave been significant changes from previous years,whether the accounts reflect the activities undertakenduring the year and whether the position reported isconsistent with in�year forecasts.

The primary statementsThe Income and Expenditure Account records theincome and the costs incurred by the trust during theyear in the course of running its operations. Itincludes cash expenditure on staff and supplies aswell as non�cash expenses such as depreciation (acharge that reflects the consumption of the assetsused in delivering healthcare). It is the equivalent ofthe profit and loss account in the private sector. Ifincome exceeds expenditure, the trust has a surplus.If expenditure exceeds income, a deficit is incurred.

The Balance Sheet provides a snapshot of the trust’sfinancial condition at a specific moment in time – theend of the financial year. It lists assets (everything thetrust owns that has monetary value), liabilities (moneyowed to external parties) and taxpayers’ equity (publicfunds invested in the trust). At any given time, theassets minus the liabilities must equal taxpayers’ equity.

Summary


The Cash Flow Statement summarises the cashflows of the trust during the accounting period. Thesecash flows include those resulting from operating andinvestment activities, capital transactions, payment ofdividends and financing. If an organisation reports asurplus on the income and expenditure (I&E) accountit does not mean its cash balance has increased by anequivalent amount. Similarly an I&E deficit would notnecessarily translate into an actual shortage of cash inthe short term. For example, while depreciation isincluded as a charge on the I&E account, it does notinvolve an outlay of cash. Similarly any capitalpurchase will involve an upfront outlay of the fullpurchase price, while the I&E account will only recordthe depreciation of the asset – spreading the full costover the lifetime of the asset. The impact of anorganisation’s operating performance on its cashposition can only be gleaned from the Cash FlowStatement and the Balance Sheet.

The Statement of Total Recognised Gains andLosses provides a summary of all the trust’s gainsand losses. The I&E account will only provide detailsof gains and losses that have been realised. But theStatement provides a summary of all gains and lossesregardless of whether or not they were shown in theI&E account or the Balance Sheet. It starts with thetrust’s surplus or deficit before the payment ofdividends (taken from the I&E account) and thenprovides details of unrealised gains and losses (iegains or losses which have not yet had any cashconsequences) such as those arising from therevaluation of property.

Notes to the accountsThe notes to the accounts provide additional detailson the entries in the primary statements as well asadditional disclosures, such as the accountingpolicies that the organisation follows when preparingits accounts.

Prior year comparatorsThe accounts include figures for the year just endedalongside the comparative figures for the prior year.This helps to identify where income, expenditure,assets and liabilities have changed compared with theprevious 12 months. Where differences are significant,NEDs should ensure they understand why thedifferences have arisen. However, if the figures are thesame for the two years it does not mean NEDs shouldnot probe deeper. For example, steady expenditure ina particular area could indicate a failure to deliver on asavings programme.

PublicationNHS bodies must publish an annual report andaudited accounts as one document and present it ata public meeting. NHS organisations can choose toproduce summary financial statements for publicationwith the annual report in addition to the full set ofaccounts. The summary financial statements consistof the four primary statements and selected notes.Where summary financial statements are produced,the full annual accounts must be made available tothe public if requested.


The role of the auditorExternal auditors are appointed by the AuditCommission and have two broad objectives: toreview and report on the trust’s annual accounts andstatement on internal control and to review whetherthe trust has made proper arrangements for securingeconomy, efficiency and effectiveness in its use ofresources. Auditors are required to comply with theCode of Audit Practice (published by the AuditCommission) and International Standards on Auditing(United Kingdom and Ireland) (ISAs (UK&I)).

The appointed auditor will audit the trust’s annualaccounts and give an opinion stating whether theaccounts give a true and fair view of theorganisation’s affairs at the end of the financial year.Auditors will also consider the annual report andmake a statement in their audit opinion if its contentsare inconsistent with their knowledge of theorganisation.

In addition to their opinion on the accounts, auditorsare also required to issue:

• a report to those charged with governance (inmost cases the audit committee) incorporating thereport required under ISA (UK&I) 260 and settingout the main matters arising from the audit of theannual accounts; and

• an annual audit letter summarising the key issuesarising from audit work throughout the year.

Auditors also have special reporting powers and canissue a public interest report or make a referral to theSecretary of State.

TimetableFor the 2006/07 financial year, the following deadlineswere set by the Department of Health:

• Deadline for unaudited accounts to be withauditors and the Department of Health – 1 May 2007.

• Deadline for submitting audited accounts to theDepartment of Health – 25 June 2007.

Sources of furtherinformationAudit CommissionAchieving First�class Financial Management in theNHS (2004)

Good Governance: Good Financial Management(2004)

World�class Financial Management (2005)

Audit Commission Review of the NHS FinancialManagement and Accounting Regime (2006)

www.audit-commission.gov.uk

Department of HealthNHS Trust Manual for Accounts 2006/07

www.dh.gov.uk

HFMAEffective Governance in Healthcare: An IntroductoryGuide (2006)

Introductory Guide to NHS Finance (2006)

www.hfma.org.uk


Income and Expenditure Account

Note to the Income and Expenditure AccountThis note shows the trust’s underlying financial performance, stripping out the impact of any financial supportreceived from the NHS Bank or from within the local health economy (internally generated) to help the trustmanage its financial position. In 2006/07 the provision of financial support has been replaced by a regime ofloans and deposits with the Department of Health. Details of loans received or deposits placed with theDepartment of Health can be found in Notes 14 and 15 to the accounts.

The primary statements


NoteCurrent year

(£000)Prior year

(£000)

Income from activities 3 72,941 70,129

Other operating income 4 10,123 14,358

Operating expenses 5�7 (87,825) (82,937)

OPERATING (DEFICIT) SURPLUS (4,761) 1,550

Cost of fundamental reorganisation/restructuring 0 0

Profit (loss) on disposal of fixed assets 8 0 0

(DEFICIT) SURPLUS BEFORE INTEREST (4,761) 1,550

Interest receivable 188 133

Interest payable 9 0 0

Other finance costs – unwinding of discount 16 0 0

(DEFICIT) SURPLUS FOR THE FINANCIAL YEAR (4,573) 1,683

Public Dividend Capital dividends payable (2,721) (2,469)

RETAINED SURPLUS (DEFICIT) FOR THE YEAR (7,294) (786)

Currentyear (£000)

Prior year(£000)

Retained deficit for the year (7,294) (786)

Financial support included in retained deficit for the year – NHS Bank 0 0

Financial support included in retained deficit for the year – internally generated 0 0

Retained deficit for the year excluding financial support (7,294) (786)

These two lines provide details of anyfinancial support – either from the NHSBank or from other NHS bodies in thelocal health economy (internallygenerated) – that has been used toimprove the reported year�end position.

The real underlying performance for the year.

Questions

Do changes in income from the prior year correspond with your knowledge of the trust’s activities?

Is the surplus or deficit consistent with the forecasts made during the year?

Do the figures seem reasonable and complete, including those entries that are zero?

Does the financial support disclosed agree with your knowledge of the trust’s financial position?


This includes all income from patient care. The main source of income is from primary care trusts (PCTs). Other sources of income areprivate patients and the NHS Injury Costs Recovery Scheme.

Non�patient care income including education, training and research funding.

All operating costs including staff, supplies, premises costs and services from other NHS and non�NHS bodies.

The operating surplus/deficit is equivalent to the operating profit/loss in the private sector.

Trusts earn interest on short�term deposits but there are strict rules that limit the scope of investments. Interest is payable on loans, onlate payments and charges on finance leases.

A financing charge relating to provisions made for future payment, for instance expected payouts relating to a permanent injury benefitclaim.The unwinding charge entered here reflects the difference between this year’s and last year’s estimates for the current cost offuture payments (Box A).

This is a dividend paid to the Treasury via the Department of Health. It represents a charge for capital. It can be seen as the dividend paidon the Secretary of State’s investment in the trust both relating to the original capital assets transferred to the trust on formation and anysubsequently issued public dividend capital. It is calculated at 3.5% of forecast net relevant assets and is paid in two instalments duringthe year. Note 23.2 shows whether the dividends actually paid equal 3.5% of actual average net relevant assets.

The retained surplus/deficit shows whether the trust has achieved its departmental financial target to breakeven for the year. This isdifferent from the statutory duty to breakeven ‘taking one year with another’ which is measured over three or exceptionally five years. Thetrust’s performance against this statutory duty is shown in Note 23.

In the NHS, most costs arising from reorganisations would be classified as operating expenses and not identified separately.

The difference between the sale proceeds of a fixed asset (such as a building or piece of equipment) and its current value.

Box A – Supplementary information

Provisions

NHS trusts make provisions for expected future liabilities. For example, as the result of an expected personal injury claim made by amember of staff the trust could expect to make a payment in the future to settle the claim. Or the trust may be responsible for futurepension payments to staff, who are injured at work and retire on ill�health grounds. The full cost of likely future payouts such as thesehas to be included as operating expenditure in the year in which the incident relating to the claim occurred. The provision in theaccounts is discounted to reflect the falling value of money (a payment in five years’ time is worth less than a payment of the sameamount now because of the impact of inflation). Each year as the provision moves nearer to being settled the value of the provisionshown in the Balance Sheet increases as the discount originally applied reverses (ie the impact of the time value of money reduces asthe time of settlement nears) gradually increasing the provision to its estimated value at the settlement date. The annual increase ischarged to the income and expenditure account as unwinding of discounts.


Balance Sheet

NoteCurrent year

(£000)Prior year

(£000)

FIXED ASSETS

Intangible assets 10 0 0

Tangible assets 11 78,077 75,136

Investments 14 0 0

78,077 75,136

CURRENT ASSETS

Stocks and work in progress 12 1,489 1,635

Debtors 13 3,104 4,720

Investments 14 0 0

Cash at bank and in hand 18 247 247

4,840 6,602

CREDITORS: Amounts falling due within one year 15 (10,032) (6,230)

NET CURRENT (LIABILITIES) ASSETS (5,192) 372

TOTAL ASSETS LESS CURRENT LIABILITIES 72,885 75,508

CREDITORS: Amounts falling due after more than one year 15 0 0

PROVISIONS FOR LIABILITIES AND CHARGES 16 (181) (447)

TOTAL ASSETS EMPLOYED 72,704 75,061

FINANCED BY: TAXPAYERS’ EQUITY

Public dividend capital 22 48,940 44,989

Revaluation reserve 17 29,427 29,454

Donated asset reserve 17 1,049 1,082

Government grant reserve 17 0 0

Other reserves 17 0 0

Income and expenditure reserve 17 (6,712) (464)

TOTAL TAXPAYERS’ EQUITY 72,704 75,061

Questions

Are the changes in fixed assets in line with your knowledge of the trust’s capital programme?

Do the changes in debtors and creditors from the prior year seem reasonable?

Are there any significant variances, or figures that seem very high or very low?

Does the trust have a positive working capital?

Has the level of provisions changed significantly from the previous year? If so, are you satisfied with the reasons for this?

Does the Balance Sheet balance?


Computer software licences, other licences, patents and development expenditure.

Land, buildings, dwellings, assets under construction, plant and machinery, transport, information technology (IT) and furniture and fittings.

Debtors represent money owed to the trust at the Balance Sheet date.

NHS trusts do not generally have powers to invest surplus funds. Foundation trusts do have more freedom to make investments, whichgenerate income for the trust. Deposits with the Department of Health would be shown as current asset investments.

Includes all cash balances in bank accounts. However, an overdraft would appear in ‘creditors’ and is not offset against other cash andbank balances.

Creditors represent money owed by the trust including any loans repayable to the Department of Health.

The difference between current assets and current liabilities. This is the working capital of the trust used to maintain day�to�dayoperations. Negative working capital would suggest the need for short�term support – or a working capital loan – to help the trust meetpayments due to creditors. This is available through the Department of Health’s working capital loans and deposits scheme.

Creditors represent money owed by the trust including any loans repayable to the Department of Health.

A provision is a liability where the amount and timing are uncertain.While there has been no cash payment at this point, the trustanticipates making a payment at a future date and so its net assets need to be reduced accordingly.

At the formation of NHS trusts, assets (land buildings, equipment and working capital) transferred to the new trusts.The value of these assets isin effect the public’s equity stake in the trust and is known as Public Dividend Capital (PDC). It is similar to company share capital and as withcompany shares, a dividend is payable to the Department of Health. It is calculated at 3.5% of forecast net relevant assets.

Each year the Department of Health issues new PDC to support NHS capital development and this too attracts dividend payments. From2007/08, the practice of issuing PDC to trusts to support new capital projects is being replaced with a more commercial system involvinginterest�bearing loans.

Reserves record the changes in asset values held by the trust as well as any cumulative surplus/deficit reported through the I&E account.More detail is given in Note 17.

NHS trusts do not generally have powers to invest surplus funds. Foundation trusts do have more freedom to make investments, whichgenerate income for the trust. An example of a fixed asset investment might be an investment in a subsidiary company set up to exploitintellectual property. Any such investment would require approval from the Secretary of State.


Cash Flow Statement

NoteCurrent year

(£000)Prior year

(£000)

OPERATING ACTIVITIES

Net cash inflow from operating activities 18 3,665 4,016

RETURNS ON INVESTMENTS AND SERVICING OF FINANCE

Interest received 188 133

Interest paid 0 0

Interest element of finance leases 0 0

Net cash inflow from returns on investments and servicing of finance 188 133

CAPITAL EXPENDITURE

(Payments) to acquire tangible fixed assets (5,083) (4,682)

Receipts from sale of tangible fixed assets 0 0

(Payments) to acquire intangible assets 0 0

Receipts from sale of intangible assets 0 0

(Payments) to acquire/receipts from sale of fixed asset investments 0 0

Net cash inflow/(outflow) from capital expenditure (5,083) (4,682)

DIVIDENDS PAID (2,721) (2,469)

Net cash (outflow) before management of liquid resources andfinancing

(3,951) (3,002)

MANAGEMENT OF LIQUID RESOURCES

(Purchase) of investments with Department of Health 0 0

(Purchase) of other current asset investments 0 0

Sale of investment with Department of Health 0 0

Sale of other current asset investments 0 0

Net cash inflow/(outflow) from management of liquid resources 0 0

Net cash inflow/(outflow) before financing (3,951) (3,002)


Cash generated from normal operating activities (Note 18).

Cash received on short�term deposits and interest paid relating to costs of financing the trust, eg loans or deposits with the Departmentof Health and interest charges under finance leases.

Payments for new capital assets and receipts from asset sales.

The PDC dividend paid to the Department of Health.

Cash flows relating to current asset investments including any deposits placed with Department of Health under the loans and depositsscheme.

The net cash inflow/(outflow) from operating activities, costs of running the trust, capital receipts and payments and the payment of dividend.In effect the additional cash the trust needed over and above what it could generate itself to conduct its business.The Department of Healthset a limit on the amount of external finance trusts can obtain. Performance against this limit is shown in Note 23.3.


NoteCurrent year

(£000)Prior year

(£000)

FINANCING

Public dividend capital received 4,951 3,024

Public dividend capital repaid (not previously accrued) (1,000) 0

Public dividend capital repaid (accrued in prior period) 0 0

Loans received from Department of Health 0 0

Other loans received 0 0

Loans repaid to Department of Health 0 0

Other loans repaid 0 0

Other capital receipts 0 0

Capital element of finance lease rental payments 0 0

Cash transferred (to)/from other NHS bodies 0 0

Net cash inflow/(outflow) from financing 3,951 3,024

Increase/(decrease) in cash 0 22

Cash Flow Statement (continued)

Question

Do the figures seem reasonable and complete, including those entries that are zero?


Receipt or payment of PDC during the year to finance the purchase of new fixed assets or to return capital to the Department of Healthfollowing the disposal of fixed assets.

These are loans both for working capital purposes and for capital.

Other capital receipts are donations and government grants for the purchase of fixed assets.

Provides details of where additional cash came from to support cash needs. In case of net inflow of cash, shows how extra cash was used.


Statement of Total Recognised Gains and Losses

Current year(£000)

Prior year(£000)

(Deficit) surplus for the financial year before dividend payments (4,573) 1,683

Unrealised surplus (loss) on fixed asset revaluations/indexation 1,067 6,587

Increases in the donated asset and government grant reserve due toreceipt of donated and government grant financed assets 97 104

Total recognised gains and loses for the financial year (3,409) 8,374

Prior period adjustment 0 0

Total gains and losses recognised in the financial year (3,409) 8,374

Question

Do the figures appear reasonable, for instance, those relating to donated and government grant funded assets?


Taken from the I&E account.

Gains/losses that the trust has made because of a change in the asset values, but where the assets have not been sold so there is no‘cash’ profit. In essence the gain is only ‘potential’.

If trusts have materially under� or over�reported gains or losses in a prior year, a correction can be made here to recognise the additionalgain/loss. Trusts can only make prior period adjustments for two reasons; either because of a fundamental accounting error in a prioryear’s accounts or because of a material change in accounting policy.

Total gain/loss for the year.

Gains due to donations or assets financed by non�Department of Health government grants.

1. Accounting policiesThis note sets out the accounting rules, which NHS trusts must follow when preparing their accounts. Thesepolicies are largely dictated by UK Generally Accepted Accounting Practice (UK GAAP) and the Department ofHealth Manual for Accounts and Capital Accounting Manual. NHS trusts do not have the authority to amendthese policies. One of the main policies is that income and expenditure is recognised on an accruals basis,meaning it is recorded in the period in which services are provided not when cash is received or paid out. Whereincome is received for an activity to be delivered in the following year, that income is deferred. It also sets out therules directing when purchases should be recorded as capital expenditure and how assets should be valued anddepreciated. In summary this section explains the basis on which all entries in the accounts are made.

2. Segmental analysisThis note separates out the financial results for healthcare�related activities from any other activities pursued bythe trust. For most trusts, there will be no need for any segmental analysis as all activities will be classed ashealthcare activities. There are tight criteria governing where segmental reporting may be required (for instancethe activity earns returns on investment that are out of line with healthcare activities) and if it is significant (forinstance its assets are 10 per cent or more of the total net assets of the trust).

3. Income from activitiesThis note gives a more detailed breakdown of the trust’s income for patient care services in the form of a table.Income is net of any credit notes issued in�year.

Notes to the accounts


Income from activities Currentyear (£000)

Prior year(£000)

Strategic health authorities (SHAs) 1,267 1,246

NHS trusts 0 0

PCTs 71,022 67,851

Foundation trusts 0 0

Local authorities 0 0

Department of Health 0 0

NHS other 0 0

Non NHS – Private patients 141 424

Non NHS – Overseas patients (non�reciprocal) 0 0

Non NHS – Road Traffic Act 439 548

Non NHS – Other 72 60

72,941 70,129

The main source of income is for workcommissioned by PCTs. This entry wouldalso include any income to offset anyfixed asset impairments (Box B).

Income received for joint carearrangements with local authorities or fordelayed discharges.

Income from treating overseas visitors fromcountries where there are no reciprocalhealthcare agreements. Reciprocalarrangements exist with most Europeancountries meaning healthcare is deliveredfree to patients.Trusts receive funding fromthe Department of Health via their PCT.

If someone is injured in a road traffic accident, and requires hospital treatment the trust is able to charge a standard accident andemergency attendance fee and if inpatient care is provided the costs (up to a limit) can be claimed through the private insurance system.Now replaced by the NHS Injury Costs Recovery Scheme.

Question

Do the income figures appear reasonable and can officers explain the reasons for any significant changes from the previous year?

Income received from SHAs and othertrusts for patient care services.

4. Other operating incomeThis provides a breakdown of income not directly related to patient care.


Other operating income Currentyear (£000)

Prior year(£000)

Patient transport services 0 0

Education, training and research 4,712 4,781

Charitable and other contributions toexpenditure 152 219

Transfers from donated asset reserve 178 191

Transfers from government grant reserve 0 0

Non�patient care services to other bodies 2,997 6,870

Income generation 1,064 981

Other income 1,020 1,316

10,123 14,358

Other income covers income not reportedin the categories above and may includestaff payments relating to use of carsprovided by the trust or income receivedfrom the Department of Health for non�patient care services.

Box B – Supplementary information

Impairments

Impairments occur where there is a loss in the value of a fixed asset compared to that recorded in the Balance Sheet. If somethinghappens to the asset or the environment in which it is used that could indicate a fall in value, trusts are required to undertake animpairment review.Alternatively, impairments may come to light as a result of the routine five�yearly revaluation of NHS assets or aspart of a valuation in preparation for redevelopment or disposal. Circumstances which may indicate an impairment include where anasset becomes surplus to requirements, where an asset cannot be used or where the asset becomes obsolete or is damaged.

An impairment could take place because a change in the fixed asset or the business environment has permanently reduced its capacityto generate revenue, or more usually in the NHS, to provide services. This is a consumption of the economic benefits that had beenexpected to flow from the continuing use of the fixed asset so its value to the trust is reduced.Alternatively, the impairment could becaused by a general fall in prices and so be seen as temporary. Different accounting treatments apply in each case. In the first case, theconsumption of economic benefits is treated in the same way as depreciation and so treated as a cost in the I&E account. The secondcase is treated purely as a valuation adjustment and is dealt with by adjusting the revaluation reserve on the Balance Sheet andrecorded in the Statement of Total Recognised Gains and Losses. To protect organisations from taking a hit on their bottom line (thetrust’s overall financial position), the Department of Health currently provides funding for impairments that go through the I&E account ata proportion of the impairment value depending on the size of the impairment. The trust would then use the cash from this income torepay PDC to reflect the fall in the value of its fixed assets.

For an ambulance trust only, this itemwould appear in income from activities(Note 3).

Examples include for laundry, pathology,payroll, internal audit and training services.

This is notional income to offset thedepreciation charge relating to donatedassets or assets funded via governmentgrants.

Income from non�patient care activitiessuch as car parking, catering, staffnurseries and accommodation charges.

Funds to cover the costs of providing education and training come from MPET (Medicaland Professional Education and Training) levies. The levies comprise SIFT (ServiceIncrement For Teaching undergraduate medical students) MADEL (Medical And DentalEducation Levy for postgraduate medical training) and NMET (Non Medical Education andTraining for nursing and other professional staff training). These funds are allocated by theDepartment of Health via SHAs. Organisations undertaking research can also receivefunding through a research and development levy.

5. Operating expensesThis note is split into two parts, the first analyses the trust’s operating expenses and the second furtheranalyses operating lease costs and commitments. An operating lease (which would cover only a proportion ofthe asset’s useful life and often includes maintenance or service aspects) is distinct from a finance lease, whichis defined as a lease where the risks and rewards of ownership transfer to the lessee. Finance leases aretherefore treated as capital expenditure. Payments under finance leases are capitalised and therefore areincluded on the Balance Sheet. They also impact on the trust’s capital resource limit (CRL) (Note 23.4). Thereare detailed rules to distinguish between finance and operating leases.

Operating expenses Currentyear (£000)

Prior year(£000)

Services from other NHS trusts 1,254 1,237

Services from other NHS bodies 714 526

Services from foundation trusts 6 15

Purchase of healthcare from non�NHS bodies 103 49

Directors’ costs 532 470

Staff costs 61,599 57,577

Supplies and services – clinical 11,731 11,550

Supplies and services – general 1,239 1,168

Establishment 966 1,167

Transport 73 106

Premises 2,884 2,477

Bad debts 10 34

Depreciation and amortisation 3,810 3,557

Fixed asset impairments and reversals 0 0

Audit fees 245 144

Other auditor’s remuneration 0 0

Clinical negligence – annual premium 1,666 1,761

Other 993 1,099

87,825 82,937


Questions

Do the expenditure figures appear reasonable and can officers explain the reasons for any significant changes from the previous year?

Directors’ and staff costs are often of interest to users of the accounts.Are you satisfied that these are correct?

Can officers explain the level of bad debts that have been written off?

Do you know what expenditure has been included in the ‘other’ category?


These three lines show the trust’s expenditure under contracts with other trusts, foundation trusts and other NHS bodies (including PCTs). Itmight typically include services such as pathology, speech therapy, occupational health services or back office functions such as payroll.

Trusts can purchase healthcare services from the private sector.These could include diagnostic services.

This figure includes the total paid to executive and non�executive directors including employer’s National Insurance, employer’s pension costsand early retirement costs. It excludes redundancy costs.

Total employment costs of all staff other than directors. Costs include employer’s National Insurance and pension contributions and earlyretirement costs and payments made to outside organisations for agency staff. However, redundancy costs are reported in ‘other costs’ below.

Establishment includes items such as printing, postage, telephone, advertising and travel expenses.Transport includes vehicle insurance, fuel and oil, maintenance equipment and hire of transport.Premises include all the trust’s utility costs, furniture and other property�related revenue expenditure such as rates, rent and insurance.

These are non�NHS debts written off during the year because they will not be paid.Also included is the increase or decrease in the provision fornon�NHS debts which are unlikely to be paid in the future.

Depreciation is an accounting charge recognising that capital assets are ‘consumed’ over their useful lives. For instance, IT equipment isdepreciated over five/seven years on a straight line basis, meaning one�fifth/seventh of its upfront cost is assigned to each of the five/sevenyears of the assumed asset life.As there is no cash outlay for this expenditure the ‘cash’ retained from depreciation charges is used to fundcapital expenditure or repay amounts of PDC.Amortisation is the equivalent to depreciation for intangible fixed assets recognising the‘consumption’ of the asset over the course of its life.

When a trust impairs a fixed asset, due to the consumption of economic benefit, the reduction in value is recorded here as expenditure.Although this does not itself involve a cash payment, it would worsen the organisation’s reported financial position – perhaps even resulting ina deficit on its I&E account. In the NHS, a system has operated whereby the Department of Health provides funding for these impairmentcharges (recorded under PCT income – Note 3).This offsets the impairment charge to the I&E account.The trust would then be expected touse the cash to repay PDC (see Balance Sheet), hence creating a circular flow of funds.

The trust pays an annual premium to the NHS Litigation Authority (NHSLA) as part of the Clinical Negligence Scheme for Trusts. Premium levelsare influenced by a range of factors, including the type of trust, the specialties it provides and the number of clinical staff it employs. Discountsare available to those trusts that achieve the relevant NHSLA risk management standards and to those with a good claims history.

All other expenditure including redundancy costs, injury benefit costs and non�car and non�property insurance.

6. Staff costs and numbersThis note gives details about the number and cost of the trust’s employees including senior managers. Itidentifies salary costs and pension contributions as well as giving details of management costs and ill�healthretirements.

7. Better Payment Practice CodeThe Better Payment Practice Code requires trusts to pay all undisputed NHS and non�NHS trade invoices bythe due date or within 30 days of receipt of goods or a valid invoice, whichever is the later. The target in theNHS is for trusts to pay 95 per cent of invoices within 30 days. This note reports on how the trust performedagainst this target. It also gives details of any interest paid under late payment legislation, which is includedwithin the interest payable line of the I&E account (Note 9).

8. Profit/loss on disposal of fixed assetsThis note analyses the profit or loss on disposal of fixed assets. The note can be omitted if the amount isimmaterial. The profit or loss is the difference between the sale proceeds (less any costs incurred in disposingof the asset) and the net book value of the asset. The note breaks the profit or loss into components relating todisposal of fixed assets, intangible fixed assets, land and buildings and plant and equipment (Box C).


Question

Has the trust met the target of paying 95 per cent of undisputed invoices within 30 days?

Question

Does the change in staff costs correspond to the change in staff numbers from the previous year?

9. Interest payable and similar chargesThis note analyses interest payable on any finance leases, late payment of invoices under the Late Payment ofCommercial Debts (Interest) Act 1988 and on loans made to the trust by the Department of Health.

10. Intangible fixed assetsIntangible fixed assets include software licences, trademarks, patents and research development expenditure.A table tracks through the value of intangible fixed assets from their value at the beginning of the year, takingaccount of additional purchases, donations, disposals, revaluations and amortisation to arrive at the new totalvalue for the year end. The table is very similar to that included for tangible fixed assets (Note 11).

11. Tangible fixed assetsTangible fixed assets include: land, buildings, dwellings, assets under construction, plant and machinery,transport equipment, IT and furniture and fittings. A table shows the changes in the trust’s tangible fixed assetsduring the year. The table separates out the different types of asset. Below is an example for buildings andplant and machinery. This section also includes analysis of the net book value of land, buildings and dwellingsthat are held on freehold, long leasehold (over five years) and short leasehold. This should include on�BalanceSheet private finance initiative deals. See table overleaf.


Box C – Supplementary information

Valuations

NHS asset values carried in the Balance Sheet (ie their net book value) are governed by a number of rules.

If an open market value (ie what it could be sold for) can be established for a building for its existing use, this is the value that should beused. This would be determined by professional valuers. However, most NHS buildings are specialised in nature and there is no realopen market. Instead the valuation is based on depreciated replacement cost (DRC) which involves establishing the cost of replacing thebuilding and then depreciating it (reducing the value) to reflect its condition and age. This value is determined by professional valuers,who have to apply prescribed rules and methodologies. In both circumstances the asset values are updated annually using indices toensure the valuation is current. A full revaluation of the NHS estate is undertaken every five years.

Equipment assets are valued at current cost, which is generally the depreciated replacement cost. In practice this is currently thepurchase cost, indexed to reflect changes in value of the asset as new, and then depreciated.

Example of how a new fixed asset would be shown in the accounts

A trust builds a small unit at a construction cost of £1m.The cash payments to build the asset are shown in the Cash Flow Statement as‘acquisition of tangible fixed assets’. The unit is a specialised building and is professionally valued on a DRC basis at £0.9m which isincluded in the fixed assets category in the Balance Sheet. The difference between the valuation and build costs (£0.1m) is taken to therevaluation reserve as a loss and is reported in the Statement of Total Recognised Gains and Losses. This treatment is specified in theNHS Capital Accounting Manual. The building is depreciated (eg £0.025m) once it starts being used and the charge is taken to the I&Eaccount and reduces the asset value in the Balance Sheet (year�end value £0.875m).

In the following year the net book value of the building (£0.875m) is indexed and the change in value (eg an increase of £0.05m) is added tothe fixed asset as shown in the Balance Sheet.This gain is also taken to the revaluation reserve and reported in the Statement of TotalRecognised Gains and Losses. Depreciation is charged for the year based on the value of the building after indexation has been applied.


Tangible fixed assets Buildings excludingdwellings (£000)

Plant and machinery(£000)

Cost or valuation at beginning of year 54,448 16,031

Additions purchased 1,305 1,077

Additions donated 97

Additions government granted 0 0

Impairments 0 0

Reclassifications 1,344 868

Indexation 995 287

Other in�year revaluation (578) 0

Disposals 0 (267)

Cost or valuation at end of year 57,514 18,093

Depreciation at beginning of year 0 9,585

Charged during the year 2,107 1,145

Impairments 0 0

Reversal of impairments 0 0

Reclassifications 0 0

Indexation 0 151

Other in�year revaluation 0 0

Disposals 0 (267)

Depreciation at end of year 2,107 10,614

Net book value

– Purchased at beginning of year 54,158 5,689

– Donated at beginning of year 290 757

– Government granted at beginning of year 0 0

Total at beginning of year 54,448 6,446

– Purchased at end of year 55,116 6,766

– Donated at end of year 291 713

– Government granted at end of year 0 0

Total at end of year 55,407 7,479

Question

Does the asset classification agree with your knowledge of the trust’s assets?


For land/buildings and assets under construction the cost/value of assets at the start of the year will be the value when bought or at thelast formal revaluation plus the impact of any subsequent indexation and depreciation charged to date (ie the closing net book value ofthe previous year). For other assets it will be the original purchase cost adjusted for indexation (Box D).

Changes to the existing asset base covering new assets bought and sold and the impact of indexation.

The cost/value of assets at the end of the year. For plant and machinery this is the gross value and takes no account of depreciation chargedsince its purchase. For buildings it takes account of depreciation up to and including the previous year.

Depreciation is the charge made to reflect the consumption of an asset’s value over its lifetime. Opening depreciation for plant and machineryis the depreciation charged since the asset was bought. However, cumulative depreciation is not recorded for buildings. Instead their closingnet book value from the previous year (which takes account of depreciation for that year) is used as the opening balance for cost/value. Land isnot depreciated.The table then tracks the movements in depreciation during the year.

An asset’s net book value – ie the asset’s value as recorded in the accounts – is the current value or cost of replacement minus thedepreciation charged.

Box D – Supplementary information

Revaluation and indexation

The NHS uses current cost accounting to report the value of its assets. This aims to capture the impact of inflation on asset values byreporting them at their current replacement cost (ie the cost of obtaining an identical replacement). It differs from historic costaccounting, which would value an asset for Balance Sheet purposes at the price paid when it was bought. It would be time�consumingand costly to fully revalue all assets every year. Instead the NHS uses a system of indexation. Each year assets’ values are multiplied bypublished indices to give the new current cost/value. In addition land and buildings face a full professional revaluation every five years.The net book value is the current cost/value of the asset (the original cost/value plus indexation) minus the depreciation charged sinceacquisition. Land is not depreciated. If a revaluation results in a new valuation that is lower than the current book value, this reduction isan impairment. Depending on the cause of the impairment, the loss in value is either treated as a cost in the I&E account or dealt with byadjusting the revaluation reserve on the Balance Sheet (Box B, page 17).

12. Stocks and work in progressThis section analyses the stock and work in progress broken down into raw materials and consumables, workin progress and finished goods. Entries under work in progress will be rare as, in the past, partially completedspells have not generally been accounted for as work in progress. Trusts can, however, account for partiallycompleted spells if this is consistent with their accounting policies. Similarly there are likely to be few entriesunder ‘finished processed goods’.

13. DebtorsThis section analyses the trust’s debtors (ie the amounts of money owing to the trust at the Balance Sheet date). Itdivides the analysis between the amounts falling due within one year and those due after more than one year. Theanalysis is broken down into NHS debtors, prepayments and accrued income and other debtors. It also identifiesany provision for potential bad debts with non�NHS bodies (ie the debts they do not expect to be paid).Transactions with other NHS bodies are never treated as bad debts. A prepayment is an amount already paid forbenefits that will be delivered in future. So, for instance, a trust might pay for next year’s rates and this wouldincrease its debtors. Accrued income is money owed to the trust for which the trust has not yet raised an invoice.

14. InvestmentsNHS trusts have limited powers to make investments. There are two categories of investment: fixed asset andcurrent. Fixed asset investments, which for instance could include an investment in a subsidiary companyestablished to exploit intellectual property, are held for the long term and are rare as the Secretary of State forHealth must approve them.

Current asset investments are held for the short term. Treasury management rules prevent NHS trusts from takingunnecessary risks with public money, prohibiting investments in stocks and shares. For trusts current assetinvestments would include any amounts deposited with the Department of Health under the loans and depositsscheme. Allowances issued under the European emissions trading scheme (permissions to emit pre�agreed amountsof carbon) are also treated as current asset investments although they are identified separately.

15. CreditorsCreditors (representing the money owed by the trust but as yet unpaid) are analysed in two groups – those duewithin one year and those due after more than one year. The separate analysis is needed to assess the trust’sworking capital or net current assets, which represents the money the trust can call upon to finance its day�to�dayoperations. The breakdown separates out NHS creditors from non�NHS trade creditors and includes a separateline for tax and social security payments still to be made. The trust may have more short�term liabilities thanassets, giving it negative working capital. In this event it is likely to need support from the working capital loansand deposit scheme to maintain liquidity (ie have access to enough cash to meet its bills in the short term).


Question

Are there any particularly large debtors or creditors this year, or significant changes from the prior year? Can officers explain thereasons for these?

Question

Are there any particularly large debtors or creditors this year, or significant changes from the prior year? Can officers explain thereasons for these?

16. Provisions for liabilities and chargesA provision is a liability where the amount and timing are uncertain. So, for instance, if an employee had anaccident at work and was bringing a legal claim against the trust, the trust would not know the actual cost ortiming of any cash payout. In these circumstances it would estimate the cost and make a provision for thatamount in the accounts in the year in which the incident happened. This would be recorded as expenditure inthe I&E account, which would impact on the trust’s year�end financial position. However, the trust would notyet have paid out the cash for these provisions. This note provides more details on these provisions.

Provisions are broken into five different classes: pensions relating to former directors; pensions relating to otherstaff; legal claims; restructurings; and an ‘other’ category. In recent years this other category might havecontained provisions made relating to the introduction of the Agenda for Change pay system. An example ofhow provisions are reported is given below for legal claims.

NHS trusts pay an annual premium to the NHSLA to participate in the Clinical Negligence Scheme for Trusts.The NHSLA then takes responsibility for settling all clinical negligence claims. This means trusts do not have tomake any provisions for clinical negligence claims. However, the claims recognised in the books of the NHSLAon behalf of the trust are disclosed in a footnote to the provisions table.

Provisions for liabilities and charges

Legal claims (£000)

At beginning of year 211

Change in discount rate 0

Arising during the year 69

Utilised during the year (86)

Reversed unused (57)

Unwinding of discount 0

At end of year 137

Expected timing of cashflows

Within one year 79

Between one and five years 58

After five years 0


The starting point is the level of provisions carried forward fromthe previous year. The table then tracks how this has changedthrough the year. This will include increases to allow for newclaims arising in�year. It will also include reductions to reflectpayouts made during the year for which earlier provisions hadalready been made and an adjustment for settlements that werebelow the original provision made or to reflect cases dropped bythe claimant or won by the trust. It also reflects the impact of thediscount rate (Box E).

Box E – Supplementary information

Discount rate

The provision in the accounts is discounted to reflect the falling value of money (a payment in five years’ time is worth less than apayment of the same amount now because of the impact of inflation). Each year as the provision moves nearer to being settled the valueof the provision shown in the Balance Sheet increases as the discount originally applied reverses (ie the impact of the time value ofmoney reduces as the time of settlement nears) gradually increasing the provision to its estimated value at the settlement date. Theannual increase is charged to the I&E account as unwinding of discounts.

Question

Are provisions reasonable and sufficiently prudent to cover the trust against future liabilities?

17. Movement on reservesThe bottom half of the Balance Sheet shows how the total assets employed (the final figure in the top half ofthe Balance Sheet) have been financed. The sources of finance include investment by the government,donated assets, surpluses made by the trust and the revaluation of assets through indexation of land, buildingsand equipment. This section tracks the movements on the trust’s reserves principally covering: revaluations,donated assets, government grant and I&E.

The revaluation reserve records changes in value of the trust’s fixed assets. An entry would be made eachtime a fixed asset’s value changed. This could be as a result of the formal five�yearly revaluation or as a resultof indexation (between formal revaluations indices are used to calculate current asset values). So as the valueof existing assets in the top half of the Balance Sheet goes up, this is balanced by an increase in therevaluation reserve. Impairments (or a loss of asset value) that are not the result of a consumption of economicbenefits lead to a corresponding reduction in the revaluation reserve.

Donated assets are included in the fixed assets recorded in the top half of the Balance Sheet. However, unlikenormal assets they have not been funded by PDC from the government so a donated asset reserve is createdwhich will equal the total value of the donated assets.

The government grant reserve represents the value of any government grants principally used to makepurchases of fixed assets. These may be grants from Europe, from local authorities or governmentdepartments excluding the Department of Health.

The I&E reserve is the cumulative balance of any surplus or deficit reported through the I&E account and gainstransferred from other reserves once realised.

An example of how movements are tracked on reserves is shown below.

Movements on reserves Revaluation reserve (£000)

Income and expenditurereserve (£000)

At beginning of year as previously stated 29,454 (464)

Prior period adjustments 0 0

At beginning of year as restated 29,454 (464)

Transfer from the I&E account (7,294)

Fixed asset impairments 0

Surplus on other revaluations/indexation of fixed assets 1,046

Transfer of realised profits (losses) to the I&E reserve 0 0

Receipt of donated/government granted assets 0 0

Transfers to the I&E account for depreciation, impairment,and disposal of donated/government granted assets

0 0

Other transfers between reserves (1,073) 1,046

Other movements on reserves 0 0

Reserves eliminated on dissolution 0 0

At end of year 29,427 (6,712)



The starting point is the closing balance for the reserve at the end of the previous year, which is then adjusted for any prior year adjustments.

Transfers between reserves. Over all asset categories this is neutral. For example, a transfer is made from the revaluation reserve to the I&Ereserve to match the additional depreciation that is charged to the I&E account because an asset has been revalued.This results in therevaluation reserve reducing in line with the asset.

The closing position for each reserve.The balance on the I&E reserve does not necessarily equate to the cumulative surplus/deficit which isused to measure whether the trust has met its statutory breakeven duty as the reserve includes transfers from other reserves (Note 23).

Reductions or increases in asset values as a result of impairments not due to consumption of economic benefits, revaluation, or indexation arerecorded here.

When a donated fixed asset is sold the sale proceeds are transferred from the donated asset reserve to the I&E reserve.

This is the amount included in other income to offset the effect of depreciation charges etc on donated/government granted assets charged tooperating expenses (Note 4).

At the end of the financial year any surplus or deficit shown in the I&E account is transferred to the I&E reserve, which shows the cumulativeimpact of surpluses and deficits from prior years.

18. Notes to the Cash Flow StatementThe Cash Flow Statement summarises the cash flows of the trust during the accounting period. It shows thecash coming in and flowing out of the organisation. Just because an organisation reports a surplus does notmean its cash balance has increased by an equivalent amount. Similarly a deficit would not necessarilytranslate into a shortage of cash in the short term. For example, while depreciation is included as a charge onthe I&E account, it does not involve an outlay of cash. Similarly any capital purchase will involve an upfrontoutlay of the full purchase price, while the I&E account will only record the depreciation of the asset – spreadingthe full cost over the lifetime of the asset. The impact of an organisation’s operating performance on its cashposition can only be gleaned from the Cash Flow Statement and the Balance Sheet.

The top half of the Cash Flow Statement shows the net cash inflow or outflow before financing. This is basicallythe cash generated from operating activities minus cash spent on new assets (capital expenditure) minusdividend payments (the PDC dividend paid to the Department of Health). The bottom half of the statement thenshows any external sources of cash received during the year taking account of new PDC and loans. So if thetop half of the statement shows a net outflow of cash, the bottom half shows where the trust got the money tofinance that outflow. The difference between the top and bottom halves of the statement reveals the net impactof the year’s activities on the trust’s cash position, for instance, the increase or decrease in cash balancesduring the year after taking account of any overdrafts.

The starting point for the Cash Flow Statement is the net cash flow from operating activities. The main table inthis note translates the operating deficit or surplus in the I&E account into the net cash flow from operatingactivities during the year.

The table starts with the net operating surplus/deficit, taken from the I&E account. It then adds back anyexpenditure recorded in the I&E account that did not involve a real cash outflow. Examples of non�cashexpenditure include depreciation and fixed asset impairments that resulted in a charge to the I&E account. Anynotional income also has to be discounted. Examples of notional income – ie income that does not involve areal cash inflow – include income recorded in other operating income (Note 4) to balance out the depreciationcharge relating to donated assets or assets funded by government grant.

Reconciliation of operating surplus to net cash flow from operating activities

Currentyear (£000)

Prior year(£000)

Total operating (deficit) surplus (4,761) 1,550

Depreciation and amortisation charge 3,810 3,557

Fixed asset impairments and reversals 0 0

Transfer from donated asset reserve (178) (191)

Transfer from the government grant reserve 0 0

Decrease/(increase) in stocks 146 (150)

Decrease/(increase) in debtors 1,616 (945)

Increase/(decrease) in creditors 3,298 0

Increase/(decrease) in provisions (266) 195

Net cash inflow/(outflow) from operating activities before restructuring costs 3,665 4,016

Payments in respect of fundamental reorganisation/restructuring 0 0

Net cash inflow from operating activities 3,665 4,016


The change in stocks, debtors, creditors and provisions would also have an impact on cash. A decrease instock held or in the money owed to the trust (debtors) would equate to an increase in cash. Similarly anincrease in money owed by the trust (creditors) or an increase in provisions (money put aside for anticipatedfuture payment) would increase cash currently available.

Further tables in this section provide details of how much of the change in cash in the period is due to changesin the trust’s level of debt (eg cash flows relating to loans and finance leases).

19. Capital commitmentsProvides details of future capital expenditure that the trust is committed to make. For instance, a contract maybe in place to undertake future building works.

20. Post Balance Sheet eventsThis provides details of any significant events that have occurred since the Balance Sheet was prepared thatdo not require adjustment to the figures in the accounts. It might include plans to seek foundation trust statusor the signing of a private finance initiative deal.

21. ContingenciesThese are events that happened before the year�end that may give rise to a future payment, but where theliability is so uncertain that accounting rules prevent the liability being included in the Balance Sheet. Thesepossible liabilities are only disclosed in the accounts as a contingent liability.

22. Movement in Public Dividend CapitalThis note tracks the change over the year in the PDC held by the trust. The PDC represents the outstandingpublic debt of an NHS trust, made up of the original investment in the trust by the Secretary of State plus anysubsequent annual PDC investments to support new capital expenditure. From 2007/08, the practice of issuingnew PDC to support capital investment is being replaced with a system of loans.

Starting with the previous year’s final balance for PDC, the table adds on any new PDC issued to supportcapital projects and deducts any PDC repaid. PDC may be repaid when the trust’s investment in fixed assets isless than the depreciation charged in the accounts. Alternatively it could relate to a real reduction in the value ofa fixed asset following an impairment or disposal of assets. PDC is only usually written off in the case of trustmergers with the Treasury’s permission (see table overleaf).


Question

Do the entries for these notes correspond with your knowledge of the trust’s activities?

Question


Question


23. Financial performance targetsThis note shows how the trust performed against its key financial performance targets including targets on:

• breakeven performance;

• capital cost absorption;

• external financing limit; and

• capital resource limit.

23.1 Breakeven performance

Trusts have a statutory duty to achieve breakeven ‘taking one year with another’ (which means that expendituremust not exceed income over three or, exceptionally, five years). This statutory duty is the key duty for NHStrusts. However, the Department of Health has set a departmental target to achieve breakeven each and everyyear. This differs from the statutory duty. Note 23.1 shows performance against the statutory duty. Trusts thatare in danger of breaching this statutory duty are required to agree a financial recovery/turnaround plan withtheir SHA, where performance is monitored on a regular basis until the deficit has been recovered. This noteprovides details of the trust’s performance on breakeven over several years providing details of how the figuresare derived to make the assessment.

Each year’s performance against the breakeven duty is recorded stretching back to 1997/98. This analysisfactors in prior period adjustments (Box F). The list down the left of the table shows the years in which itwas recognised that the adjustment was needed. The different columns record the change to the relevantyear’s financial position and show the cumulative position. The table also adds back any deductions madeunder the resource accounting and budgeting (RAB) regime. This means that the income reductions made inprevious years due to the application of RAB are disregarded for purposes of measuring breakeven. Amateriality threshold applies so that a trust is considered to have achieved its breakeven duty providing thecumulative deficit is less than 0.5 per cent of current year turnover.


Box F – Supplementary information

Prior period adjustments

Trusts can only make prior period adjustments (ie adjustments to the reported financial performance in a previous year) for two reasons:either because of a fundamental accounting error in a prior year’s accounts; or because of a material change in accounting policy.

Movements in Public Dividend Capital Currentyear (£000)

Prior year(£000)

PDC as at beginning of year 44,989 41,965

New PDC received (including transfers from dissolved NHS trusts) 4,951 6,024

PDC repaid in year (1,000) (3,000)

PDC written off 0 0

PDC transferred to foundation trust 0

Other movements in PDC in year 0 0

PDC as at end of year 48,940 44,989

23.2 Capital cost absorption duty

NHS trusts are required to absorb the cost of capital (effectively the dividend paid on PDC) at a rate of 3.5 per cent of average net relevant assets. It is calculated by dividing the PDC dividend (from the I&E account)by the average net relevant assets (owned assets of the trust at the beginning and end of the year includingfixed assets and current assets less current liabilities but excluding donated assets and cash held at the Officeof the Paymaster General). The trust achieves the target if it achieves a rate of return of between 3 per centand 4 per cent.

23.3 External financing limit (EFL)

This is a cash limit on net external financing and is one of the controls used by the Department of Health tokeep cash expenditure of the NHS as a whole within the level agreed by Parliament in the public expenditurecontrol totals. Trusts must not exceed the EFL target, which effectively determines how much more (or less)cash a trust can spend over that which it generated from its activities.


Breakeven performance 1997/98(£000)

1998/99(£000) ➙

Two yearsago (£000)

Prior year(£000)

Currentyear (£000)

Turnover 44,433 48,176 75,930 84,487 83,064

Retained surplus/(deficit) for the year 40 (182) 8 (786) (7,294)

Adjustment for:

– Timing/non�cash impacting distortions

– Use of pre � 1.4.97 surpluses [FDL(97)24 Agreements]

0 0 0 0 0

– 1999/2000 Prior Period Adjustment (relating to 1997/98 and 1998/99)

142 0

– 2000/01 Prior Period Adjustment (relating to 1997/98 to 1999/2000)

47 0

– Current year Prior Period Adjustment (relating to 1997/98 to prior year)

0 0 0

– Other agreed adjustments 0 0

Breakeven in�year position 229 (182) 8 (786) (7,294)

Breakeven cumulative position 229 47 8 (778) (8,072)

The trust is in the process of agreeing arecovery plan with the SHA which willachieve breakeven in (specify year)

Materiality test (ie is it equal to or less than 0.5%):

– Breakeven in�year position as a percentage of turnover

0.52% (0.38%) 0.01% (0.93%) (8.78%)

– Breakeven cumulative position as a percentage of turnover

0.52% 0.10% 0.01% (0.92%) (9.72%)

23.4 Capital resource limit

NHS trusts have to keep capital expenditure within a limit set by the Department of Health. This ensures thatoverall capital expenditure is kept within the limit set by the Treasury for the Department of Health.

24. Related party disclosuresThis note provides details of any material transactions that board members or managers or theirrelations/spouses etc have undertaken with the trust. The Department of Health is regarded as a related partyand is seen as the parent body for all NHS bodies and so this note also lists the NHS organisations that thetrust has had transactions with during the year.


Capital resource limit Currentyear (£000)

Gross capital expenditure 5,684

Less: book value of assets disposed of 0

Plus: loss on disposal of donated assets 0

Less: capital grants 0

Less: donations towards the acquisition of fixed assets (97)

Charge against the CRL 5,587

CRL 5,595

Underspend against the CRL 8

The trust’s capital expenditure for the year.This differs from the capital expenditurefigure in the Cash Flow Statement as itincludes capital creditors at the year end (ie invoices received but not paid) andexcludes capital creditors at start of year.

External financing limit(£000)

Currentyear (£000)

EFL 3,951

Cash flow financing 3,951

Finance leases taken out in the year 0

Other capital receipts 0

External financing requirement 3,951

Undershoot (overshoot) 0

The trust’s cash limit on externalfinancing.

The trust’s actual external financingrequirement is calculated by adding theactual cash spent over what the trustcould generate itself to any financeleases (which are treated as capitalexpenditure and count against the EFL)and deducting any funding for capitalspending received from donations orgovernment grants.

Gross capital expenditure is adjusted forthe book value of fixed asset disposals, anylosses on disposal of donated fixed assetsand for any grants or donations used to buynew fixed assets to determine the actualcharge against the CRL.

Question

Has the trust met its financial performance targets? If not, can officers explain the reasons?

25. Private finance initiative (PFI) transactionsThis note analyses PFI schemes that have been deemed to be off�Balance Sheet. These are arrangementswhere the trust is buying a service – for instance, the provision and maintenance of a working hospital or facility– rather than procuring a capital asset. Being off�Balance Sheet, the schemes are paid for from revenueresources as part of operating expenses rather than from capital resources. Details are included of thepayments that the trust is committed to as part of the various PFI schemes listed. The note also analyses theservice elements of these schemes that are judged to be on�Balance Sheet.

26. Pooled budgetIf the trust is part of a project financed by a pooled budget (under Section 31 of the Health Act 1999) –perhaps with a local authority social services department – details may be included here.

27. Financial instrumentsFinancial instruments are a broad range of assets and liabilities that arise from contracts and result in a financialasset being created in one entity and a financial liability in another.

This note discloses the interest rate risks arising from the trust’s financial assets and liabilities which largelycomprise loan transactions due after more than one year such as long�term debtors and creditors andprovisions made under contract. For most NHS trusts the risk exposure is low.

28. Third party assetsDetails are given here of assets held by the trust on behalf of a third party such as money held on behalf ofpatients that is not included elsewhere in the accounts.

29. Intra�government balancesLists balances with other government departments or agencies including amounts owed for National Insuranceand Value Added Tax.

30. Losses and special paymentsAny losses or special payments are disclosed here. These are payments that Parliament would not haveenvisaged healthcare funds being spent on when it originally provided the funds. Examples might include someclinical negligence payments (although virtually all clinical negligence claims are now handled through theNHSLA), fraudulent payments, personal injury payments or legal compensation. It is the responsibility of thetrust to approve these cases but a register must be kept of all such payments.


Question

If there are any entries in this note, have they been approved by the trust’s audit committee?

Healthcare Financial Management Association (HFMA)Suite 32, Albert House, 111 Victoria Street, Bristol BS1 6AXTel: 0117 929 4789 Fax: 0117 929 4844www.hfma.org.uk

Audit Commission1st Floor, Millbank Tower, Millbank, London SW1P 4HQTel: 020 7828 1212 Fax: 020 7976 6187 Textphone (minicom): 020 7630 0421www.audit�commission.gov.uk

To order additional copies of this report please contact:Audit Commission Publications, PO Box 99, Wetherby, LS23 7SA Tel: 0800 502030Stock code: HOT3394

Documents

NHS trust accounts